How to effectively manage litigation of FCPA claims

Since the beginning of 2014, the Department of Justice (DOJ) has filed more than six cases involving the Foreign Corrupt Practices Act (FCPA), and the Securities and Exchange Commission (SEC) has commenced two enforcement actions. In April, April the SEC and the DOJ announced settlements with Hewlett Packard Co. (HP) for alleged violations of the FCPA. As part of the settlement, a Russian subsidiary of HP admitted it paid bribes to obtain a technology contract with the Russian government. The settlement reportedly will cost HP $76.8 million in criminal penalties.

The FCPA prohibits U.S. companies from bribing foreign government officials. The improper acts can include non‑monetary “favors” or items that traditionally may have been considered “gifts.” The U.S. government is attempting to draw a line between appropriate practices and illegal activities.

The legal fees incurred in such investigations can be enormous. Often, the settlement in FCPA litigation can pale in comparison to the costs incurred to comply with the investigation. There have been reports of investigations requiring the services of 85 individual attorneys. Such large and complex matters require intense litigation management to be handled effectively.

Insurance and FCPA claims

A key aspect of the general counsel’s litigation management arsenal is the company insurance program. Companies facing FCPA claims often tender those matters to their directors and officers liability (D&O) carriers.

D&O policies can provide some protection against loss arising from a claim alleging a “wrongful act” committed by the company’s officers and directors. Because most FCPA claims involve at least some allegations directed at the company as well as management, the company can also purchase optional coverage to protect the company. That coverage can be an important facet of a comprehensive insurance program.

For many companies, however, the scope of available entity coverage may be limited to “securities claims,” as that term is defined in the applicable policy provisions. Some policies however expressly exclude FCPA claims.

Ultimately, neither entity D&O nor FCPA‑specific policies provide complete protection. Perhaps most importantly, neither type of policy is likely to cover the company against fines or penalties imposed by the DOJ or SEC. One of the biggest limitations of the applicable insurance for FCPA claims is that most D&O policies do not cover the expenses incurred in defending or investigating a matter that has yet to become a “claim,” even if the matter eventually evolves into formal litigation.

A “claim” typically includes a written demand for monetary damages. It also may include the commencement of litigation. General counsel need to be aware that the issuance of a legal process, such as a subpoena, may not constitute a “claim” as defined by the policy.

Significant sums can be incurred in early investigation activities which may result in insurers declining coverage. This is a prime reason that intensive litigation management techniques must be utilized to aggressively manage the early phases of a FCPA investigation which may be paid for out of the Company’s own pocket.

Managing fees and costs not covered by the insurance asset

The costs of conducting a FCPA investigation are often revealed in filings with the SEC. Major U.S. corporations have reported spending massive sums in investigation costs pertaining to FCPA‑related multinational probes. For example, Avon disclosed in its 2012 annual report that it has spent over $300 million since 2009 on attorney’s fees in FCPA investigations. Wal-Mart also revealed that it has incurred $157 million for “professional fees and expenses” related to a bribery and corruption scheme concerning its business operations in Mexico in the early 2000s.

What can be done to effectively manage such costs? There needs to be a focused and informed litigation management program in place, prior to commencing a FCPA investigation.

At the heart of an effective litigation management program are the guidelines and budget protocol set forth in these guidelines. These rules are useful in managing the early phases of an investigation where things move quickly. The guidelines provide direction and structure to outside counsel, particularly in its handling of complex international investigations. The guidelines should articulate common sense, cost‑effective principles of litigation management. Guidelines standing alone, however, are not enough. In‑house counsel need to take a proactive role in the management of investigation related costs.

Thorough billing guidelines must:

Address procedures for regular transmission of work product to the client

Prohibit billing for activities performed for more than one client at the same time (“double billing”)

Provide for requisite detail in billing statements

Require notice of staff changes

Mandate effective use of technology

Impose reasonable limitations on the number of attorneys who may be deployed for various tasks

Guidelines also require an outside counsel to obtain the client’s advance approval before undertaking certain types of work and the retention of experts and consultants. Most guidelines also require counsel to inform the company before commencing various major projects or initiatives.

In general terms, billing guidelines memorialize the economic relationship between the client and retained counsel. These guidelines tend to cover the costs of handling the costs of a complex international investigation and attempt to prevent the expenditure of unnecessary fees. Experience has shown that well‑drafted litigation management guidelines combined with clear budgeting protocols and good communication successfully controls the costs of an investigation, as well as defining the parties’ relationship.

Conclusion

It is imperative that in‑house counsel put into place clear, concise and express billing guidelines to govern outside counsel billing practices, particularly in FCPA claims. In‑house counsel should require its outside counsel and every member of his or her investigation team to read the guidelines and to explicitly acknowledge the rules. In-house lawyers should openly and directly discuss those billing practices that they cannot tolerate. In‑house counsel accordingly should discuss their expectations upfront and conduct an early and detailed review of invoices to eliminate practices that are inappropriate.